BUSINESS

Diversification Poses Major Challenge for U.K.'s Octel

Faced with phaseout of use of its major product, lead alkyls producer is moving to find new products based on raw material, marketing expertise Patricia L. Layman, C&EN London

Imagine a company founded 50 years ago to provide one product, which it has done ever since. But various governments around the world have begun phasing out that product, and the market is shrink­ing inexorably. What to do, and how to do it?

A classic business-school case, per­haps, but for the management and staff of London-based Associated Octel, no mere academic exercise. For up until the early 1980s, the company's sole product was lead al-kyl antiknock compounds for gaso­line. And the handwriting has been on the wall for quite a while; gov­ernments in the U.S. and the Euro­pean Community have phased out, or have taken action that will even­tually phase out, the use of lead alkyls in gasoline.

Diversification is the obvious step for a company 90% of whose $328 million ($1.00 = £0.61 in 1987) U.K.-based sales in 1988 will be in lead alkyls. Octel is, indeed, pursuing such a strategy. There is one major complication to such efforts, how­ever—its ownership. Although day-to-day management of the compa­ny is an Octel matter, the company is owned by a consortium of five U.K. and U.S. oil companies, all of whom have chemical operations. Their representatives make up the board of directors, controlling all capital investment, and they have made it clear that diversification into

any areas in which Octel could com­pete with the parents would be dis­tinctly unwelcome.

The moves to diversify are mak­ing quite a change for a company celebrating 50 years of stability. The company that ultimately became As­sociated Octel was founded in 1938, with the encouragement of the Brit­ish government. Anticipating the coming war, the government rec­ognized the need for a domestic supply of lead alkyls to upgrade the fuel used by the then-new gen­eration of fighter planes, including the Spitfire and the Hurricane.

By mid-1940, the first tetraethyl lead plant was built at Northwich, in Cheshire, near Liverpool. The same year a bromine-extraction plant was built on the Cornish coast, at Hayle; the bromine was destined for dibromoethane, the scavenger in antiknock compounds that helps prevent deposits forming in engine cylinders.

After World War II, in January 1948, the Associated Ethyl Co. took over the running of the two plants. And by 1953, rapidly rising demand

spurred two new plants: one, for lead alkyls, at Ellesmere Port oppo­site Liverpool on the Mersey; and another plant, for bromine extrac­tion, at Amlwch, Anglesey, the large Welsh island jutting into the Irish Sea. In 1961, partly to reduce prob­lems of confusion with Ethyl Corp. in the U.S., the company changed its name to Associated Octel.

In the intervening years, the com­pany did well, and, as the U.K. chemical industry's fifth-largest ex­porter, twice won the prestigious Queen's Award for Export Achieve­ment.

However, the problems were be­ginning to form in the U.S.—where, ironically, Octel has never marketed its lead alkyls. As environmental­ists and regulators focused on smog reduction in the early 1970s, they turned to the concept of catalytic converters. Lead poisoned the cata­lysts, so it followed that the use of lead alkyl additives in gasoline was to be phased out, gradually but inevitably.

"As soon as that happened, we all realized the market was in de-

Associated Octel at a glance

Headquarters:

Sales: Total, about $492 million ($1.00 = £0.61 in 1987) in 1987; from U.K. operations, about $328 million this year. Sales into all countries ex­cept U.S., Canada, and Mexico

Ownership: British Petroleum (36.7%), Shell (36.7%), Texaco (10.65%), Chev­ron (10.65%), and Mobil (5.3%)

Number of employees: 2300

Main products: Additives for gasoline and diesel fuels, bromine- and sodium-based specialty chemicals

Plant, lab sites: Ellesmere Port, near Liverpool; Amlwch, Anglesey, Wales; Bletchley; Holywell, North Wales

Affiliate companies: SIAC, 50-50 joint venture with Montedison, with manu­facturing and marketing operations in Italy. Octel-Kuhlmann, 50-25-25 Octel, Atochem, and Rhône-Poulenc, with manufacturing only; marketing by Octel S.A., wholly owned by Octel, In France and Francophone Africa. A.K. Chemie, 57-43 joint venture with West German refiners, with manufacturing and mar­keting operations in West Germany

16 July 11, 1988 C&EN

cline," recalls Ivor W. Little, busi­ness development manager, and member of the executive commit­tee. "Gasoline consumption in the U.S. is roughly equal to gasoline consumption everywhere else in the world. We all realized the good days were over. The question was, how far, how fast, was the rest of the world going to go?"

The next major market to begin pressuring lead alkyls was in West­ern Europe, primarily in the envir­onmentally aware countries, such as Denmark, West Germany, the Nether lands , and other Nordic countries. But whereas the U.S. was concerned about lead as a side issue to the whole question of reducing nitrogen-oxide emissions from ve­hicles, the Europeans tackled lead alkyls on health grounds. Eminent scientists and physicians were lined up on either side, asking if lead in the atmosphere could adversely af­fect the intelligence levels of young children, for example.

EC has now acted, enabling mem­ber countries to phase out the use of lead additives, and some have already done so. Says Octel's Little: "It is easy to forecast consumption of leaded gasoline in the European Community. The difficulty is in pre­dicting the consumption in other major markets. Some areas are not exactly forthcoming—Eastern Eu­rope, for example."

The company's forecasts come up with a major conclusion, however: "The lead alkyls market worldwide is not declining as far and as fast as the average person would expect," Little adds. "It is declining—that is beyond question. But it is not 'we will be making them three more years and that is it.' In a diversifica­tion program, that is important."

Once the Environmental Protec­tion Agency in the U.S. had made its decision, however, Octel knew that it would eventually have to diversify into other businesses. By this time, the problems that Octel faced had already been faced by U.S. producers Ethyl, Du Pont, PPG In­dustries, and Nalco Chemical; PPG and Nalco have dropped out, leav­ing Du Pont producing lead alkyls at its Chambers Works in Deepwa-ter, N.J. with marketing in the U.S. by both Ethyl and Du Pont, and

Ethyl marketing the production out­side the U.S.

Little explains, "We formally appointed a new-business manager and started to work out what a for­mal strategy should be. The first thing we had to do was sit down with our five owners, and say: 'Now look, what are you prepared to let us do with your money?' "

"They didn't say 'wither on the vine,' but they didn't give us carte blanche, either," says Little. "In­stead, they did say two things. One, we should diversify by starting as close to the core business as we could. Two, they gave us a warning, quite rightly: They would not sup­port our diversification efforts if what we would do would compete with their business interests. All of the five owners have chemical in­terests. If you add all the nonoil interests, it's a lot of territory."

However, fortunately for Octel, there was no conflict of interest in its basic expertise—bromine, chlo­rine, and sodium. It has been in the area of those materials and the re­lated chemistry, and its own mar­keting strengths in the transport-fuels field, that Octel has turned its efforts in diversification.

As Little points out, "To make lead alkyls, you have to use large quantities of sodium, chlorine, and bromine. We have a sodium plant, the biggest in Europe, with about 25,000 metric tons per year. We have a chlorine works of about 70,000 metric tons per year. And our Amlwch seawater extraction plant processes about 30,000 metric tons per year of bromine . Our first thought about diversification was, if we have all these basics, what can we do to turn them to higher-value-added products?" Higher-value-added chemicals became the first leg of Octel's diversification strategy.

Of the three, chlorine will be the most difficult to broaden out, be­cause Octel is a relatively small pro­ducer. U.K. chemicals giant ICI, for example, has chlorine capacity at nearby Runcorn of 790,000 metric tons per year—more than 10 times the size of Octel's capacity. "Our chlorine production costs aren't the lowest in the land," says Little. "That's why there is less progress

Little: Octel didn't get carte blanche

to make with chlorine than with sodium or bromine chemicals."

That's not to say it can't be done. For example, for the past 18 months, Octel has been packaging and sell­ing coproduction caustic soda as a 73% solution, the highest concen­tration that will remain liquid at room temperature—a rare form for commodity sodium hydroxide.

The picture is different with so­dium metal, where, Little notes, "we are reasonably satisfied with our production costs." The closing this summer of ICI's plant in the U.K. leaves Octel the only producer in Britain of the metal, and one of only three in Europe.

Octel has identified several op­portunities for sodium chemicals. One, with a plant under construc­tion, is sodium methylate, a 28% sodium suspension in methanol, as an intermediate for fine chemicals and vitamins. There are plans for two other sodium chemicals plants the company hopes to have in its capital budget in 1989, and a fur­ther two in 1990.

The company seems to be placing most of its chemicals diversification efforts, however, in bromine.

Even in this area, the company has some fundamental problems to take into account. One major factor is that the concentration of bromine in seawater is 65 ppm. The major

July 11, 1988 C&EN 17

Business

U.S. producers, Great Lakes Chemi­cal and Ethyl, draw brine from wells, with bromine content of 7000 to 8000 ppm. And another potential competitor in this specialty chemi­cal area is Israel, which takes brine from the Dead Sea, working with bromine content of well above 10,000 ppm. Little says that the Is­raelis, already large-scale produc­ers, are upgrading, and now have 140,000 metric tons per year of bro­mine capacity—"four and a half times the size of Amlwch. Their costs are considerably lower than ours."

The company has already com­missioned a plant to produce hy-drobromic acid, to be used for phar­maceutical and agrochemical inter­mediates. It already has plans to alter that plant to make other forms of hydrogen bromide. And last month it commissioned a new plant for dibromomethane, an intermedi­ate for biocides. Another project is bromochloromethane, also a biocides intermediate. And three more brom-inated-chemicals projects have been sanctioned by the board.

The other plank of Octel's diver­sification efforts rests on the com­pany's expertise in marketing to the oil industry. As Little points out, "Lead alkyls are petroleum addi­tives. Our customers are oil refiner­ies around the world. We market in every country in the world but Mexico [where production of lead alkyls is state-owned], the U.S., and Canada. This is a totally different world from 'specialty chemicals.' Our strength there is our respected entrée into virtually any oil refin­ery in the world, and our products application engine laboratory at Bletchley."

The Bletchley lab was originally set up to provide backup for lead alkyls—whether a refinery should use tetraethyl lead, or tetramethyl lead, or perhaps a combination, and so on—and to keep up to date on engine developments and fuel needs.

"The engine lab can be convert­ed to look at other petroleum addi­tives, and the means to market them," explains Little, who then points out that it is a direction for Octel to proceed in, with caution. "Here, there are conflicts of inter­est with our owners. Several do own,

wholly or in part, transport fuel ad­ditives businesses."

Indeed, according to some sources, there have been some problems with proposals that Octel brought before its board. However, at least several have gone through.

The first one involves cetane-number improvers, used in auto­motive diesel fuel. Cetane numbers are to diesel fuels roughly what oc­tane numbers are to gasoline. These particular improvers also just happen to be nitrated alcohols—explosives.

Says Little, "We have absolutely no experience with that technology. We therefore formed a joint venture with ICI's subsidiary, Nobel's Ex­plosives Co., in 1986, to manufac­ture cetane-number improvers. No­bel's Explosives makes them in Scot­land, we market them worldwide."

And Octel has received board au­thorization for a new plant to pro­duce detergent additives for both automotive diesel fuel and gasoline, due on stream the fourth quarter of this year.

"Our problem," Little notes, "is that up to now, we have not got experience in the chemistry of de­signing transport fuel additives— actually building the molecules. So we have had to rely on outside sources for the product," rather than generating the products internally. The detergent additives were li­censed from the French Institute of Petroleum, and a cloud-point depres­sant for diesel fuel currently being test marketed was developed by Elf, the French state-owned refiner.

The eventual goal is for Octel "to be in a position to provide refiners with a cocktail to suit their needs. Some of the components may be made by us, or a joint venture, and if we need any other components, we would buy them," he adds. "But by 1990, or in the near future, the market in Europe will be a formula­tion market—winter diesel fuels, for example, and so on. That's what we're gearing up to meet."

How the two planks of diversifi­cation work out is uncertain. But, clearly, such organic growth will not keep Octel from slimming down over the next few years. Its income from lead alkyls sales will decline by 1992, by what company officials concede will be "a very significant

amount," simply because the vol­ume will be down.

Volumes are already shrinking, to the point that in 1986, Octel closed its old lead alkyls plant at Northwick to concentrate its oper­ations in the much larger plant at Ellesmere Port. Capacity at Ellesmere Port is 93,000 metric tons per year of lead alkyls, and this year, the company says, it will be running at full capacity.

With the inevitable loss of sales and income, it is difficult to see how internally generated growth could possibly keep the company at its current size. Acquisitions must play a role for the company's con­tinued growth, but these will be restricted by the business parame­ters set by its owners, and it would seem that the board is not terribly keen on the idea of an expanded acquisitions program.

Octel has made one small acqui­sition, to expand its development and production capabilities. Last Oc­tober, it snapped up from Johnson Matthey a small Welsh laboratory, Palmer Research, which has a spe­cialty in small-volume production.

"It fills a niche in the specialty chemicals field we were not able to enter otherwise," Little observes, "for small volumes, between 1 and 100 metric tons per year, of compli­cated chemicals involving multistage syntheses.These would be high val­ue, more than £5 [about $8.00] per kilo and hopefully double that. There was that enormous gap be­tween several kilos from the lab, and a full-scale production plant. Palmer Research as it will be offers the way to fill that gap."

The possibility of acquisitions and diversification along its two lines of expertise—marketing and raw-material chemistry—present the challenge for Octel. It's a challenge duly accepted by the company's management, who are all too aware of the attendant problems.

According to Little, "There is scope, and we haven't exhausted it, for further diversification within our two major areas. It is not inexhaust­ible, but we've not got to the end yet." He adds, wryly, "What we would love to find is a new use for lead alkyls, but we don't think there is one." D

18 July 11, 1988 C&EN